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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the Quarterly Period Ended
OR
ENTERPRISE DIVERSIFIED, INC.
(Exact Name of Registrant as Specified in Its Charter)
Commission file number
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| None | Not applicable | Not applicable |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The number of shares outstanding of the issuer’s Common Stock, $0.125 par value, as of November 10, 2021 is
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including, without limitation, Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein, contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan,” and similar expressions and variations thereof identify certain of such forward-looking statements which speak only as of the dates on which they were made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties which may affect the Company’s business and prospects, including changes in economic and market conditions, acceptance of the Company’s products, maintenance of strategic alliances, and other factors discussed elsewhere in this Form 10-Q, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors.
| Financial Statements |
And Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2021 (unaudited) | December 31, 2020 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Investment redemption receivable | ||||||||
| Other current assets | ||||||||
| Current assets - held for resale | ||||||||
| Total current assets | ||||||||
| Long-term Assets | ||||||||
| Real estate - held for investment, net | ||||||||
| Property and equipment, net | ||||||||
| Goodwill, net | ||||||||
| Note receivable | ||||||||
| Long-term investments | ||||||||
| Other assets | ||||||||
| Total long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued compensation | ||||||||
| Accrued expenses | ||||||||
| Deferred revenue | ||||||||
| Income taxes payable | ||||||||
| Notes payable, current | ||||||||
| Total current liabilities | ||||||||
| Long-term Liabilities | ||||||||
| Notes payable, net of current portion | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, par value, shares authorized; issued | ||||||||
| Common stock, par value, and shares authorized; and shares issued and outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues - asset management | $ | $ | $ | $ | ||||||||||||
| Revenues - real estate | ||||||||||||||||
| Revenues - internet operations | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Cost of revenues - real estate | ||||||||||||||||
| Cost of revenues - internet operations | ||||||||||||||||
| Total cost of revenues | ||||||||||||||||
| Gross profit - asset management | ||||||||||||||||
| Gross profit - real estate | ||||||||||||||||
| Gross profit - internet operations | ||||||||||||||||
| Total gross profit | ||||||||||||||||
| Selling, general, and administrative expenses | ||||||||||||||||
| Insurance | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Salaries and wages | ||||||||||||||||
| Travel and meals | ||||||||||||||||
| Other operating expenses | ||||||||||||||||
| Total selling, general and administrative expenses | ||||||||||||||||
| Income from operations | ||||||||||||||||
| Gain on sale of noncontrolling interest in subsidiary | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense), net | ||||||||||||||||
| Total other income | ||||||||||||||||
| Income from continuing operations before income taxes | ||||||||||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ||||||||||||
| Income (loss) from continuing operations | ( | ) | ||||||||||||||
| Income from discontinued operations, net of taxes | ||||||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | $ | ||||||||||
| Net income (loss) per share, basic and diluted | ( | ) | ||||||||||||||
| Net income (loss) per share from continuing operations, basic and diluted | ( | ) | ||||||||||||||
| Net income per share from discontinued operations, basic and diluted | ||||||||||||||||
| Weighted average number of shares, basic | ||||||||||||||||
| Weighted average number of shares, diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
| Common Stock |
Amount |
Additional Paid-in Capital |
Accumulated Deficit |
Total Stockholders’ Equity |
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| Balance December 31, 2020 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Net income (loss) |
— | |||||||||||||||||||
| Stock issuance |
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| Balance March 31, 2021 |
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| Net income (loss) |
— | |||||||||||||||||||
| Balance June 30, 2021 |
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| Net income (loss) |
— | ( |
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| Balance September 30, 2021 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Common Stock |
Amount |
Additional Paid-in Capital |
Accumulated Deficit |
Total Stockholders’ Equity |
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| Balance December 31, 2019 |
$ | $ | $ | ( |
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| Net income (loss) |
— | ( |
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| Stock issuance |
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| Balance March 31, 2020 |
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| Net income (loss) |
— | |||||||||||||||||||
| Balance June 30, 2020 |
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| Net income (loss) |
— | |||||||||||||||||||
| Balance September 30, 2020 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2021 and 2020
| 2021 |
2020 |
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| Cash flows from (used in) from operating activities: |
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| Net income from continuing operations |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash flows from (used in) operating activities: |
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| Unrealized (gains) losses on long-term investments |
( |
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| Gain on sale of noncontrolling interest in subsidiary |
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| Gain on sale of real estate |
( |
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| Depreciation and amortization |
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| Bad debt (recoveries) expense |
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| Accrued stock compensation expense |
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| Accrued interest income on notes receivable |
( |
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| Other |
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| (Increase) decrease in: |
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| Accounts receivable, net |
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| Other current assets |
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| Increase (decrease) in: |
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| Accounts payable |
( |
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| Accrued expenses |
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| Income taxes payable |
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| Deferred revenue |
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| Net cash flows from (used in) continuing operations |
( |
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| Net cash flows from discontinued operations |
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| Net cash flows from (used in) operating activities |
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| Cash flows from investing activities: |
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| Proceeds from sale of investments |
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| Purchases of investments |
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| Proceeds from sale of subsidiary |
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| Proceeds from sale of real estate |
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| Improvements to real estate held for investment |
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| Net cash flows from continuing operations |
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| Net cash flows from discontinued operations |
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| Net cash flows from investing activities |
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| Cash flows from financing activities: |
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| Principal payments on note payable |
( |
) | ( |
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| Proceeds from notes payable |
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| Net cash flows (used in) from continuing operations |
( |
) | ( |
) | ||||
| Net cash flows (used in) from discontinued operations |
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| Net cash flows (used in) financing activities |
( |
) | ( |
) | ||||
| Net increase (decrease) in cash |
( |
) | ||||||
| Cash and cash equivalents at beginning of the period |
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| Cash and cash equivalents at end of the period |
$ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
ENTERPRISE DIVERSIFIED, INC.
and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine Months Ended September 30, 2021 and 2020
| 2021 |
2020 |
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| Non-cash and other supplemental information: |
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| Transfer of real estate held for investment to held for resale |
$ | $ | ||||||
| Distribution receivable |
$ | $ | ||||||
| Transfer of real estate held for resale to held for investment |
$ | $ | ||||||
| Issuance of common stock per equity compensation plan |
$ | $ | ||||||
| Accrued interest receivable converted to Triad Guaranty, Inc. stock |
$ | $ | ||||||
| Continuing operations cash paid for interest |
$ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Lines of Business
Enterprise Diversified, Inc. (formerly White Dove Systems, Inc., Interfoods Consolidated, Inc., and then Sitestar Corporation) was incorporated in Nevada on December 17, 1992. On June 1, 2018, the Company amended its Articles of Incorporation to change the name of the Company to “Enterprise Diversified, Inc.” Unless the context otherwise requires, and when used in this Report, the “Company,” “ENDI,” “we,” “our,” or “us” refers to Enterprise Diversified, Inc. and its subsidiaries.
During the three- and nine-month periods ended September 30, 2021, the Company operated through reportable segments: Asset Management Operations, Real Estate Operations, Internet Operations, and Other Operations. Other Operations include corporate operations and nonrecurring or one-time strategic funding or similar activity that is not considered to be one of our primary lines of business. During periods prior to the quarter ended June 30, 2019, the Company also operated through a fifth reportable segment, Home Services Operations. However, for the three- and nine-month periods ended September 30, 2021, and for all prior periods presented, Home Services Operations are reported as discontinued operations. The management of the Company also continually reviews various business opportunities for the Company, including those in other lines of business.
Asset Management Operations
The Company operates its asset management operations business through its wholly owned subsidiaries, Willow Oak Asset Management, LLC (“Willow Oak”), Willow Oak Capital Management, LLC, Willow Oak Asset Management Affiliate Management Services, LLC (“Willow Oak AMS”) and Willow Oak Asset Management Fund Management Services, LLC (“Willow Oak FMS”).
In 2016, the Company made a seed investment, through Willow Oak, to assist in the launch of Alluvial Fund, LP, a private investment fund that was launched on January 1, 2017, by an unaffiliated sponsor and general partner, Alluvial Capital Management, LLC. The Company had determined that Willow Oak’s support of Alluvial Capital Management, LLC, and its direct investment in Alluvial Fund, were both beneficial and necessary undertakings in conjunction with establishing an asset management operations business and gaining credibility within that industry. As a special limited partner, Willow Oak earns a share of management and performance fees earned. On May 31, 2021, however, Willow Oak initiated a liquidating distribution of its investment in Alluvial Fund, which such withdrawal will be fulfilled by the general partner according to a mutually agreed upon cash distribution schedule. During the quarter ended September 30, 2021, Willow Oak initiated its second aggregate cash distribution totaling $
In furtherance of establishing the asset management operations business, Willow Oak signed a fee share agreement in June 2017 with Coolidge Capital Management, LLC (“Coolidge”), whose sole member is Keith D. Smith, an ENDI director. Willow Oak is the sole member of Bonhoeffer Capital Management, LLC, the general partner to Bonhoeffer Fund, LP, a private investment partnership launched by Willow Oak and managed by Coolidge. Under their agreement concerning Bonhoeffer Fund, LP, Willow Oak paid all start-up expenses and pays agreed-upon operating expenses that are not partnership expenses, Coolidge is responsible for all investment management, and Willow Oak receives
On November 1, 2018, Willow Oak entered into a fund management services agreement with Arquitos Investment Manager, LP, which is managed by our Board chairman and principal executive officer, Steven L. Kiel, to provide Arquitos with Willow Oak’s Fund Management Services (“FMS”) consisting of the following services: strategic planning, investor relations, marketing, operations, compliance and legal coordination, accounting and bookkeeping, annual audit and tax coordination, and liaison to third-party service providers. On November 1, 2020, this agreement was renewed with revised terms that include an exchange of services between Willow Oak and Arquitos. Willow Oak earns monthly and annual fees as consideration for these services.
On October 1, 2019, Willow Oak partnered with Geoff Gannon and Andrew Kuhn to form Focused Compounding Capital Management, LLC (“Focused Compounding”). This joint venture, of which Willow Oak Capital Management is a
On September 29, 2020, Willow Oak, through Willow Oak AMS, executed a strategic relationship agreement with SVN Capital, LLC to become a
Real Estate Operations
As has been previously reported, in December 2017, ENDI created a wholly owned subsidiary named Mt Melrose, LLC, a Delaware limited liability company (“New Mt Melrose”), to acquire a portfolio of residential and other income-producing real estate in Lexington, Kentucky, pursuant to a certain Master Real Estate Asset Purchase Agreement entered into in December 2017 with a like-named seller, Mt. Melrose, LLC (“Old Mt. Melrose”), a Kentucky limited liability company owned by Jeff Moore, then an ENDI director. During January and June 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed bundled acquisitions from Old Mt. Melrose of residential and other income-producing real properties located in Lexington, Kentucky. As has been previously reported, on June 27, 2019, the Company sold
As has been previously reported, in July 2017, ENDI created a wholly owned real estate subsidiary named EDI Real Estate, LLC to hold ENDI’s legacy portfolio of real estate. As of September 30, 2021, through EDI Real Estate, LLC, ENDI owns a legacy real estate investment portfolio that includes a single-family home managed by a third-party property management company and various lots of vacant land. Our real estate portfolio under EDI Real Estate, LLC is primarily located in Roanoke, Virginia.
Internet Operations
The Company operates its internet operations segment through Sitestar.net, a wholly owned subsidiary that offers consumer and business-grade internet access, wholesale managed modem services, web hosting, third-party software as a reseller, and various ancillary services. Sitestar.net provides services to customers in the United States and Canada.
Other Operations
Other operations include nonrecurring or one-time strategic funding or similar activity and other corporate operations that are not considered to be one of the Company’s primary lines of business. Below are the main recent activities comprising other operations. Additional investment activity that is not specifically mentioned below is included in the accompanying consolidated financial statements.
Financing Arrangement Regarding Triad Guaranty, Inc.
In August 2017, the Company entered into an agreement with several independent third parties to provide debtor-in-possession financing to an unaffiliated third party, Triad Guaranty, Inc., through Triad DIP Investors, LLC. The Company initially contributed $
Corporate Operations
Corporate operations include any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company.
Discontinued Operations - Home Services Operations
Prior to May 24, 2019, the Company operated a home services operations segment through its former subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC). The Company had organized and launched this subsidiary in June 2016, initially with an unaffiliated third party. Specialty Contracting Group was focused on the management of HVAC and plumbing companies in Arizona.
As has been previously reported, on May 24, 2019, the Company completed a divestiture of the home services operations to Rooter Hero. See Note 3 for more information.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and those entities in which it otherwise has a controlling financial interest, including: Willow Oak Asset Management, LLC, Willow Oak Capital Management, LLC, Willow Oak Asset Management Affiliate Management Services, LLC, Willow Oak Asset Management Fund Management Services, LLC, Bonhoeffer Capital Management, LLC, Sitestar.net, Inc., and EDI Real Estate, LLC.
All intercompany accounts and transactions have been eliminated in consolidation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying interim consolidated financial statements are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. The December 31, 2020, consolidated balance sheet included herein was derived from audited consolidated financial statements as of that date. Certain information and footnote disclosure normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to instructions, rules, and regulations prescribed by the SEC. We believe that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim consolidated financial statements are read in conjunction with the audited financial statements and notes previously filed in our Annual Report on Form 10-K for the year ended December 31, 2020. In the opinion of management, the unaudited interim consolidated financial statements reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of September 30, 2021, and the results of operations for the three and nine months ended September 30, 2021, and 2020.
Use of Estimates
In accordance with GAAP, the preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.
On an ongoing basis, management evaluates its estimates and judgments, including, among other items, those related to fair value of investments, revenue recognition, accrued expenses, financing operations, fair value of goodwill, fixed asset lives and impairment, lease right-of-use assets and impairment, deferred tax assets, liabilities and valuation allowance, other assets, the present value of lease liabilities, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. These accounting policies are described at relevant sections in the notes to the consolidated financial statements.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash, cash equivalents, accounts receivable, and notes receivable. The Company places its cash with high-quality financial institutions and, at times, may exceed the FDIC and CDIC insurance limit. The Company extends credit based on an evaluation of customers’ financial condition, generally without collateral. Exposure to losses on receivables is principally dependent on each customer’s financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company defines cash equivalents as all highly liquid instruments purchased with a maturity of three months or less.
Investments
The Company holds various investments through its asset management operations and real estate operations segments. Additionally, investments may be held and reported under the Company’s “other” segment. Assets held through these segments do not have a readily determinable value as these investments are either not publicly traded, do not have published sales records, or do not routinely make current financial information available. Investments held through the asset management operations segment are remeasured to fair value on a recurring basis. Investments held under the real estate operations and other operations segments are remeasured when additional valuation inputs become observable. See Note 5 for more information.
During the nine-month period ended September 30, 2021, and as of December 31, 2020, the Company also held its remaining equity investment in Mt Melrose, LLC through its real estate operations segment. The Company determined that its remaining equity investment did not have a readily determinable fair value, and the Company accounted for the investment at cost, less any impairment, as adjusted for changes resulting from observable price changes. As mentioned previously, on May 17, 2021, however, the Company entered into an agreement with Woodmont that terminated and effected a sale to Woodmont of the Company’s remaining membership interests in New Mt Melrose in conjunction with a cash payment to the Company. As of the prior period ended June 30, 2021, the Company does not hold any remaining interests in the New Mt Melrose entity.
Accounts Receivable
The Company’s asset management operations segment records receivable amounts for fee shares and fund management services revenue earned on a monthly basis. Performance fee shares crystalize and are collected on an annual basis while management fee shares crystalize and are collected on either a monthly or quarterly basis as dictated by the respective partnership agreement. For these reasons, performance fee shares are designated as contract assets until they crystalize annually on December 31. As of December 31, all performance fees are fully collectible and are no longer classified as contract assets. Fund management services receivables are billed monthly in line with ongoing performance. The Company historically has had no collection issues with fee share and fund management receivables, and the overall possibility for non-collection is extremely low. For these reasons, management has determined that it is not necessary to record an allowance against these receivables. A breakout of contract assets as of September 30, 2021 is noted below:
| September 30, 2021 | ||||
| Accrued contract assets per Willow Oak fee share arrangements | $ | |||
| Operating accounts receivable, net of allowance | ||||
| Total accounts receivable, net | $ | |||
The Company also grants credit in the form of unsecured accounts receivable to its customers. The estimate of the allowance for doubtful accounts, which is the recorded allowance for doubtful accounts and bad debt expense, is based on management’s assessment of current economic conditions and historical collection experience with each customer. Specific customer receivables are considered past due when they are outstanding beyond their contractual terms and are written off from the allowance for doubtful accounts when an account or invoice is individually determined to be uncollectible.
Real estate operations segment rental accounts are typically paid by tenants via cash or check no later than the fifth of the month. Any accounts collected after the fifth are charged either a flat-rate late fee or a daily-rate late fee based upon the lease agreement. If payments are not provided in a timely manner, then the amount due is designated as an account receivable. If accounts remain uncollected, then standard operating procedures are followed to commence a notice process for the tenant to either pay the amount due or vacate the property. Accounts receivable from rental revenue are generally considered unrecoverable after 90 days unless the Company reasonably believes that recovery is probable. These procedures typically result in low amounts of past due receivables.
The internet operations segment attempts to reduce the risk of non-collection by including a late-payment fee and a manual-processing-payment fee to customer accounts. Receivables more than 90 days past due are no longer included in accounts receivable and are turned over to a collection agency. Accounts receivable more than 30 days are considered past due.
As of September 30, 2021, and December 31, 2020, allowances offsetting gross accounts receivable on the accompanying condensed consolidated balance sheets totaled $
Notes Receivable
The Company does not routinely issue notes receivable in the ordinary course of business, but when a business opportunity arises, a subsidiary may issue a note if it appears to be favorable to the Company. Notes receivable are recorded at their principal amount and interest is accrued quarterly based on the applicable interest rate. The Company makes an assessment of the ultimate collectability of each note receivable on an annual basis based upon the financial condition of the borrower.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for maintenance and repairs are charged to operations as incurred, while renewals and betterments are capitalized. Gains and losses on disposals are included in the results of operations. Depreciation is computed using the straight-line method based on the estimated useful lives for each of the following asset classifications:
| Furniture and fixtures (in years) | 5 | |||
| Equipment (in years) | ||||
| Building improvements (in years) | ||||
| Buildings (in years) |
The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, then the Company uses estimated future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Property and equipment to be disposed are reported at the lower of carrying amount or fair value of the asset less cost to sell.
Goodwill and Other Intangible Assets
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the acquisition method of accounting. The Company tests its goodwill annually as of December 31, or more often if events and circumstances indicate that those assets might not be recoverable.
Impairment testing of goodwill is required at the reporting-unit level (operating segment or one level below operating segment). The impairment test involves calculating the impairment of goodwill based solely on the excess of the carrying value of the reporting unit over the fair value of the reporting unit. Prior to performing the impairment test, the Company may make a qualitative assessment of the likelihood of goodwill impairment to determine whether a detailed quantitative analysis is required. The Company estimates the fair value of its reporting units using discounted expected future cash flows.
Intangible assets (other than goodwill) consist of domain names attributed to the internet operations segment. The Company owns
impairment adjustments were recorded during the three- and nine-month periods ended September 30, 2021, and 2020.
Real Estate
Real estate properties held for resale are carried at the lower of cost or fair value. All costs directly related to the improvement and carrying of real estate are capitalized, including renovations and property taxes, to the extent the capitalized costs of the property do not exceed the estimated fair value of the property. If the cost of the real estate exceeds the estimated fair value, then the excess is charged to expense. Fair value is estimated based on comparable sales in the geographic area in which the real estate is located. Fair value is evaluated annually by management or when events or changes in circumstances indicate the carrying value of the real estate may not be recoverable.
No impairment adjustments were recorded during the three- and nine-month periods ended September 30, 2021, and 2020.
Real estate properties held for investment are carried at the cost basis plus additional costs where the cost extended the life of or added value to the property. Otherwise, the cost is expensed as incurred. Properties categorized as real estate held for investment are not expected by management to be sold in the next 12 months. This determination is periodically reviewed by management.
During the three- and nine-month periods ended September 30, 2021, $
Accrued Compensation
Accrued compensation represents performance-based incentives that have not yet been paid. Additional compensation can be paid in the form of cash or via the issuance of Company stock. Compensation structures for employees are a pre-approved part of a formal employment agreement or arrangement. Stock-based compensation, issued as part of the Company’s 2020 Equity Incentive Plan, is reserved for board members and members of senior management. The compensation accrual amount is based on the final value of Company stock that has been approved to be issued by the Governance, Compensation, and Nomination Committee of the Board of Directors. These compensation amounts are accrued when earned and able to be estimated and are paid or issued annually after financial records are finalized.
Other Accrued Expenses
Other accrued expenses represent incurred but not-yet-paid expenses from payroll accruals, professional fees, and other accrued taxes.
Leases
The Company records right-of-use (ROU) assets and lease liabilities arising from both financing and operating leases that contain terms extending longer than one year. The Company does not recognize ROU assets or lease liabilities for short-term leases (those with original terms of 12 months or less). In making our determinations, the Company combines lease and non-lease elements of our leases.
Revenue Recognition
Asset Management Operations and Other Investment Revenue
The Company earns revenue from investments and through various fee share and service agreements, including realized and unrealized gains and losses, which may result in negative period or quarterly revenues. Management fees earned are recorded monthly and are included in revenue on the accompanying unaudited condensed consolidated statements of operations. Performance fees earned are accrued monthly, paid out annually, and are also included in revenue on the accompanying unaudited condensed consolidated statements of operations. Fund management service fees are billed, paid, and recorded according to a monthly schedule. Long-term investments are marked to market at the end of each reporting period. Realized and unrealized gains and losses are recognized as revenue in the period of adjustment.
Management notes that the structure of these arrangements leaves a very low possibility for nonperformance. While the amount of revenue varies from month to month, collectability is very high. Accrued monthly performance fee shares are designated as contract assets until they crystalize annually on December 31. As of December 31, all performance fees are fully collectible and are no longer classified as contract assets. No contract liabilities are recognized or incurred.
Additionally, the Company earns revenue from direct participation in various private investment funds, primarily the Alluvial Fund. This results in the realized and unrealized gains and losses within a fund such as the Alluvial Fund being recognized as revenue, or a decrease in revenue, on the accompanying unaudited condensed consolidated statements of operations.
A summary of revenue earned through the asset management operations segment for the three- and nine-month periods ended September 30, 2021, and 2020 is included below:
| For the three months ended | For the nine months ended | |||||||||||||||
| Asset Management Operations Revenue | September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | ||||||||||||
| Realized and unrealized gains (losses) on investment activity | $ | $ | $ | $ | ||||||||||||
| Management and performance fee revenue | ( | ) | ||||||||||||||
| Fund management services revenue | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Real Estate Revenue
The Company earns real estate revenue through rental agreements on real estate held for investment, as well as through the sale of real estate held for resale.
Rental revenue from real estate held for investment is recognized when it is earned, generally on the last day of each month or at another regular period agreed upon by the Company and the tenant. Tenants generally provide a security deposit at the time of possession. This deposit is held separately from revenue and only applied to revenue when rental payment comparable to the security deposit amount is not provided in a timely manner and considered unlikely to be recovered. Otherwise, the security deposit is returned in a timely manner after the property is surrendered back to the Company. Management has concluded that the nature of the performance obligation is cyclical and predictable with a very low possibility for nonperformance. No contract assets or liabilities are recognized or incurred.
Revenue from real estate held for resale is recognized upon closing of the sale (transfer of control), as all conditions for full revenue recognition have been met at that time. All costs associated with the property sold are removed from the consolidated balance sheets and charged to cost of revenue at that time.
Internet Revenue
The Company sells internet services under annual and monthly contracts. Under the annual contracts, the subscriber pays a one-time annual fee, which is recognized as revenue ratably over the life of the contract. Under the monthly contracts, the subscriber is billed monthly and revenue is recognized for the period to which the service relates. Domain name registration revenue is recognized at the point of registration. Sales of hardware are recognized as revenue upon delivery and acceptance of the product by the customer. Sales are adjusted for any returns or allowances. Management has concluded that the nature of the performance obligation is cyclical with a very low possibility for nonperformance. Contract liabilities (deferred revenue) were recognized in the amount of collections received in advance of services to be performed. No contract assets are recognized or incurred.
The Company generates revenue in its internet operations segment from consumer and business-grade internet access, wholesale managed modem services for downstream ISPs, web hosting, third-party software as a reseller, and various ancillary services in the United States and Canada. Services include narrow-band (dial-up and ISDN) and broadband services (DSL, fiber-optic, and wireless), web hosting, and additional related services to consumers and businesses. Customers may also subscribe to web hosting plans to include email access and storage. Internet revenue is affected by the changing composition of revenue sources. In some years, this shift can be significant.
Deferred Revenue
Deferred revenue represents collections from customers in advance of services to be performed. Revenue is recognized in the period service is provided. Total deferred revenue from continuing operations increased from $
Income Taxes
Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment, inclusive of the recent tax reform act. The most recent three tax years, fiscal years ended December 31, 2020, December 31, 2019, and December 31, 2018, are open to potential IRS examination.
During the three- and nine-month periods ended September 30, 2021, the Company reported income tax expenses of
Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period.
In periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all potentially dilutive common shares is anti-dilutive. In periods of net income, diluted earnings per share is computed using the more dilutive of the “two-class method” or the “treasury method.” Dilutive earnings per share under the “two-class method” is calculated by dividing net income available to common stockholders as adjusted for the participating securities, by the weighted-average number of shares outstanding plus the dilutive impact of all other potentially dilutive common shares, consisting primarily of common shares underlying common stock equity incentives. Dilutive earnings per share under the “treasury method” are calculated by dividing net income available to common stockholders by the weighted-average number of shares outstanding plus the dilutive impact of all potentially dilutive common shares, consisting primarily of common shares underlying common stock equity incentives.
There were
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses” (Topic 326). The guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate should now reflect an entity’s current estimate of all future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions. In April 2019, the FASB further clarified the scope of the credit losses standard and addressed issues related to accrued interest receivable balances, recoveries, variable interest rates, and prepayments. In May 2019, the FASB issued further guidance to provide entities with an option to irrevocably elect the fair value option applied on an instrument-by-instrument basis for eligible financial instruments. In November 2019, the FASB issued further guidance on expected recoveries for purchased financial assets with credit deterioration, and transition refiled for troubled debt restructurings, disclosures related to accrued interest receivables, and financial assets secured by collateral maintenance provisions. The guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of certain amendments of this guidance must be applied on a modified retrospective basis and the adoption of the remaining amendments must be applied on a prospective basis. The Company currently expects that the adoption of this guidance may change the way we assess the collectability of our receivables and recoverability of other financial instruments. The Company will adopt this guidance as of January 1, 2023. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
The Company does not believe that any other recently issued effective standards, or standards issued but not yet effective, if adopted, would have a material effect on the accompanying consolidated financial statements.
NOTE 3. HISTORICAL HOME SERVICES SUBSIDIARY ASSET SALE
On May 24, 2019, as has been previously reported, the Company completed a divestiture of its Home Services Operations, via its subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC), to an unaffiliated third-party purchaser, Rooter Hero Plumbing, Inc. (“Rooter Hero”). In the transaction, all of Specialty Contracting Group’s personal property and customer lists and records were conveyed to Rooter Hero, excluding stock inventory and other current assets. As part of the transaction, Rooter Hero assumed Specialty Contracting Group’s obligations under lease and/or loan agreements for all outstanding vehicles and equipment, as well as the obligations to service all of the subsidiary’s then-remaining customer accounts going forward.
The operations of Specialty Contracting Group, LLC had been considered a component of, and the divestiture reflected a strategic shift in, the Company’s business. As such, Specialty Contracting Group, LLC’s historical operations have been classified as discontinued operations in the Company’s financial statements. The loss from discontinued operations has been determined using a loss recovery approach, as the collection of future royalties is uncertain and a reasonable estimate could not be made. This approach requires that the contingent consideration, the future royalties to be received, be valued at the lesser of the amount of the “probable,” defined as a greater than 50% likelihood, future proceeds or the carrying value of the disposed assets. Due to the unpredictability of the contingent consideration, and management’s inherent lack of control over the buyer’s operations, management determined it would not be reasonable to attempt to value the contingent consideration. This resulted in assigning the contingent consideration a current valuation of zero. As and to the extent any royalties are deemed probable, they will be subsequently recognized as a “recovery from discontinued operations” on the statements of operations and will offset, or recover, the initial loss recorded. During the three- and nine-month periods ended September 30, 2021, there were no material royalties or other activity from discontinued operations. Comparatively, during the three- and nine-month periods ended September 30, 2020, an offsetting $
As of December 31, 2020, discontinued assets reported on the face of the accompanying condensed consolidated balance sheets totaled $
A reconciliation of discontinued operations as reported on the accompanying unaudited condensed consolidated statements of operations for the three- and nine-month periods ended September 30, 2021, and 2020, is as follows:
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Selling, general, and administrative expenses | ||||||||||||||||
| Recoveries from sale of subsidiary | ||||||||||||||||
| Other income (expense), net | ||||||||||||||||
| Income (loss) reported as discontinued operations | $ | $ | $ | $ | ||||||||||||
NOTE 4. HISTORICAL SALE OF CONTROLLING INTEREST IN REAL ESTATE SUBSIDIARY
Historical Transaction
As has been previously reported, on June 27, 2019, the Company sold
In connection with this transaction, the Company and Woodmont also entered into a certain Amended and Restated Limited Liability Company Agreement of Mt Melrose, LLC (the “A&R LLC Agreement”). The A&R LLC Agreement sets forth the general terms and conditions governing the arrangements between the two members, including as to any distributions of cash to the members. The A&R LLC Agreement provides that the business and affairs of Mt Melrose will be managed exclusively by one or more managers; and Woodmont was designated as the sole manager. In addition, the Company expressly agreed to a three-year “standstill” arrangement, during which time the Company will not in any way participate, directly or indirectly, in the management or control of Mt Melrose; and with respect to any matters requiring a vote of the members, the Company will vote with (i.e., the same as) Woodmont. This arrangement was intended to allow the Company to maintain a passive management structure, while still owning a significant portion of the partnership.
While the operations of Mt Melrose, LLC were considered a component of the Company’s business, the June 27, 2019, sale did not represent a major strategic shift in the Company’s business. While we deconsolidated the operations of Mt Melrose, LLC on June 27, 2019, as a result of no longer having a controlling financial interest, Mt Melrose, LLC’s historical operations continued to be reflected as “continuing operations” in the Company’s financial statements. That is, all activity prior to the deconsolidation event was included on our consolidated statements of operations for given prior reporting periods in continuing operations, and under the real estate segment. As of June 27, 2019, all previously consolidated assets and liabilities of Mt Melrose, LLC were removed from our consolidated balance sheets, and the Company’s membership interest in Mt Melrose then became accounted for as an investment in the equity of Mt Melrose, LLC in the Company’s reported financial statements.
Accounting for Then-Remaining Mt Melrose Investment
The Company adopted ASU 2016-01 effective January 1, 2018. ASU 2016-01 generally requires entities to measure equity investments at fair value and recognize any changes in fair value in net income. However, entities are able to elect a measurement alternative for equity investments that do not have a “readily determinable fair value.” The Company determined that its equity investment in Mt Melrose did not have a readily determinable fair value at the time of deconsolidation. The Company’s inability to “exercise significant influence” due to previously reported contractual agreements, also supported the use of the measurement alternative. Under this alternative, the Company had measured the Mt Melrose investment at its implied fair value and assessed it for impairment at each reporting date.
Using the $100,000 transaction price for a 65% interest in Mt Melrose, LLC on June 27, 2019, the implied value of the Company’s retained 35% equity interest at the time of the transaction was $
However, as mentioned previously, on May 17, 2021, the Company entered into an agreement with Woodmont that terminated and effected a sale to Woodmont of the Company’s remaining membership interests in Mt Melrose, LLC in conjunction with an $
NOTE 5. INVESTMENTS
Certain assets held through the Company, Willow Oak Asset Management, LLC, or EDI Real Estate, LLC, do not have a readily determinable value, as these investments are not publicly traded, nor do they have published sales records. The investment in Alluvial Fund, LP is measured using net asset value (NAV) as the practical expedient and is exempt from the fair value hierarchy (see Note 6). The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and allocated based on total fund contributions. The Company’s investment in Alluvial Fund is remeasured to fair value on a recurring basis and realized and unrealized gains and losses are recognized as revenue in the period of adjustment. Due to the nature of the Mt Melrose, LLC investment (subsequent to the Company’s transfer, relinquishment of control, and subsequent sale (see Note 4)), the investment was measured at cost basis, as fair value was not determinable until additional inputs and measurements became available. Due to the illiquid nature of Triad Guaranty, Inc. stock and the lack of available current financial information for the entity, the Company has measured its investment at cost basis, as fair value is not determinable until additional inputs and measurements become available.
| Cost Basis | Unrealized Gain | Carrying Value | ||||||||||
| September 30, 2021 | ||||||||||||
| Alluvial Fund, LP (at fair value) | $ | $ | $ | |||||||||
| Triad Guaranty, Inc. stock (at cost) | ||||||||||||
| Total | $ | $ | $ | |||||||||
| Cost Basis | Unrealized Gain | Carrying Value | ||||||||||
| December 31, 2020 | ||||||||||||
| Alluvial Fund, LP (at fair value) | $ | $ | $ | |||||||||
| Mt Melrose, LLC (at cost) | ||||||||||||
| Total | $ | $ | $ | |||||||||
Alluvial Fund is a private investment fund that focuses on investing in what it believes are deeply mispriced securities in the United States and abroad. Alluvial Fund focuses on small companies, thinly traded issues, and special situations, seeking to identify value that its management believes the market has yet to recognize. During the three- and nine-month periods ended September 30, 2021, the Company withdrew $
NOTE 6. FAIR VALUE OF ASSETS AND LIABILITIES
GAAP defines fair value as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants at the measurement date, and establishes a hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are based on market pricing data obtained from sources independent of the Company. Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset or liability. The fair value hierarchy includes three levels based on the objectivity of the inputs as follows:
| ● | Level 1 - inputs are quoted prices in active markets as of the measurement date for identical assets and liabilities that the Company has the ability to access; this category includes exchange-traded mutual funds and equity securities; | |
|
|
| |
| ● | Level 2 - inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates or yield curves, that are observable at commonly quoted intervals; this category includes mortgage-backed securities, asset-backed securities, corporate debt securities, certificates of deposit, commercial paper, U.S. agency and municipal debt securities, U.S. Treasury securities, and derivative contracts; and | |
|
|
| |
| ● | Level 3 - inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability; the measurements are highly subjective. |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company values its investments at fair value at the end of each reporting period. See description of these investments in Note 5 above.
| (Level 1) | (Level 2) | (Level 3) | (Excluded) (a) | Total at Fair Value | ||||||||||||||||
| September 30, 2021 | ||||||||||||||||||||
| Alluvial Fund, LP | $ | $ | $ | $ | $ | |||||||||||||||
| Total investments | $ | $ | $ | $ | $ | |||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | (Excluded) (a) | Total at Fair Value | ||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||
| Alluvial Fund, LP | $ | $ | $ | $ | $ | |||||||||||||||
| Total investments | $ | $ | $ | $ | $ | |||||||||||||||
|
| (a) | Certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets. |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company analyzes goodwill on an annual basis or more often if events or changes in circumstances indicate potential impairments.
The Company values real estate held on the balance sheet on an annual basis or whenever events or changes in circumstances indicate an impairment may have occurred.
As discussed in Note 4, the Company’s previous equity investment in Mt Melrose, LLC was carried at its implied cost under the alternative approach and was assessed for impairment at each balance sheet date.
As discussed previously, the Company holds stock in Triad Guaranty, Inc. This stock was received in accordance with the December 31, 2020, revisions to the original promissory note, which included Triad stock to be issued in lieu of accrued interest. Due to the illiquid nature of Triad Guaranty, Inc. stock and the lack of available current financial information for the entity, the Company has measured its investment in the stock at cost basis. The Company’s cost basis in the stock is equal to the amount of accrued interest on the promissory note as of December 31, 2020. The Company will assess its investment in Triad for impairment at each balance sheet date or when additional inputs and measurements become available. impairments were recorded during the three- and nine-month periods ended September 30, 2021.
NOTE 7. PROPERTY AND EQUIPMENT
The cost of property and equipment at September 30, 2021, and December 31, 2020, consisted of the following:
| September 30, 2021 | December 31, 2020 | |||||||
| Computers and equipment | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation expense from continuing operations was for the three-month periods ended September 30, 2021, and 2020, and for the nine-month periods ended September 30, 2021, and 2020.
NOTE 8. REAL ESTATE
EDI Real Estate, LLC
Through EDI Real Estate, as of September 30, 2021, and December 31, 2020, the Company identified the following units as held for resale or held for investment as noted below:
| EDI Real Estate | September 30, 2021 | December 31, 2020 | ||||||
| Units occupied or available for rent | ||||||||
| Vacant lots held for investment | ||||||||
| Total units held for investment | ||||||||
| Units held for resale | ||||||||
| Vacant lots held for resale | ||||||||
| Total units held for resale | ||||||||
Units held for investment consist of single-family residential rental units.
The lease in effect as of September 30, 2021, is based on a month-to-month provision as the initial annual term of the lease has been completed. An outside property management company manages this rental property on behalf of the Company. There are no reportable future anticipated rental revenues as a result of the month-to-month provision on the remaining existing lease.
| EDI Real Estate | September 30, 2021 | December 31, 2020 | ||||||
| Total real estate held for investment | $ | $ | ||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Real estate held for investment, net | $ | $ | ||||||
For the three- and nine-month periods ended September 30, 2021, depreciation expense on the EDI Real Estate portfolio of properties was $
There were no properties sold during the three-month periods ended September 30, 2021, and 2020. Three properties were sold during the nine-month period ended September 30, 2021. Total gross proceeds for the sale of the three properties was $
NOTE 9. NOTES PAYABLE
Notes payable at September 30, 2021, and December 31, 2020, consist of the following:
| Interest Rates | Average Term | September 30, 2021 | December 31, 2020 | ||||||||||
| Interest-bearing amount due on promissory note through EDI Real Estate, LLC | | | $ | $ | |||||||||
| Interest-bearing amount due on real estate held for investment through EDI Real Estate, LLC | | | |||||||||||
| Less current portion | ( | ) | |||||||||||
| Long-term portion | $ | $ | |||||||||||
During the quarterly period ended September 30, 2018, EDI Real Estate, LLC, as a borrower, issued a promissory note secured by certain properties held for investment. This note carries an annual interest rate of
During the quarterly period ended September 30, 2017, EDI Real Estate, LLC, as a borrower, issued a promissory note secured by a property held for investment. This note carries an annual interest rate of
NOTE 10. SEGMENT INFORMATION
During the three- and nine-month periods ended September 30, 2021, the Company operated through business segments with separate management and reporting infrastructures that offer different products and services. The four business segments are as follows: Asset Management Operations, Real Estate Operations, Internet Operations, and Other Operations.
During periods prior to the quarter ended June 30, 2019, the Company also operated through a reportable segment, Home Services Operations. However, as mentioned in Note 3, the Company completed a divestiture of its home services operations on May 24, 2019. As a result, as of the three- and nine-month periods ended September 30, 2021, and for all prior periods presented, the Company’s former home services operations segment has been reported as discontinued operations.
The asset management operations segment includes revenues and expenses derived from various joint ventures, service offerings, and initiatives undertaken in the asset management industry.
The real estate operations segment includes (i) our equity in Mt Melrose, LLC, prior to the sale of the Company’s remaining membership interests on May 17, 2021, which managed properties held for investment and held for resale located in Lexington, Kentucky, and (ii) revenue and expenses related to the management of legacy properties held for investment and held for resale through EDI Real Estate located in Roanoke, Virginia.
The internet operations segment includes revenue and expenses related to our sale of internet access, hosting, storage, and other ancillary services. Our internet segment includes revenue generated by operations in both the United States and Canada. For the three-month periods ended September 30, 2021, and 2020, the internet segment generated revenue of $
The other operations segment includes revenue and expenses from nonrecurring or one-time strategic funding or similar activity and any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company.
Summarized financial information concerning the Company’s reportable segments is shown in the following tables for the three- and nine-month periods ended September 30, 2021, and 2020.
| Three Months Ended September 30, 2021 | Asset Management | Real Estate | Internet | Other | Discontinued Operations - Home Services | Consolidated | ||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of revenue | ||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Other income (expense) | ( | ) | ||||||||||||||||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ||||||||||||||||||||
| Income (loss) from continuing operations, net of taxes | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Income from discontinued operations, net of taxes | ||||||||||||||||||||||||
| Goodwill | ||||||||||||||||||||||||
| Identifiable assets | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Nine Months Ended September 30, 2021 | Asset Management | Real Estate | Internet | Other | Discontinued Operations - Home Services | Consolidated | ||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of revenue | ||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ||||||||||||||||||||
| Income (loss) from continuing operations, net of taxes | ( | ) | ||||||||||||||||||||||
| Income from discontinued operations, net of taxes | ||||||||||||||||||||||||
| Goodwill | ||||||||||||||||||||||||
| Identifiable assets | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Three Months Ended September 30, 2020 | Asset Management | Real Estate | Internet | Other | Discontinued Operations - Home Services | Consolidated | ||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of revenue | ||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Other income (expense) | ( | ) | ||||||||||||||||||||||
| Income (loss) from continuing operations, net of taxes | ( | ) | ( | ) | ||||||||||||||||||||
| Income from discontinued operations, net of taxes | ||||||||||||||||||||||||
| Goodwill | ||||||||||||||||||||||||
| Identifiable assets | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Nine Months Ended September 30, 2020 | Asset Management | Real Estate | Internet | Other | Discontinued Operations - Home Services | Consolidated | ||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of revenue | ||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Other income (expense) | ( | ) | ||||||||||||||||||||||
| Income (loss) from continuing operations, net of taxes | ( | ) | ||||||||||||||||||||||
| Income from discontinued operations, net of taxes | ||||||||||||||||||||||||
| Goodwill | ||||||||||||||||||||||||
| Identifiable assets | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
NOTE 11. COMMITMENTS AND CONTINGENCIES
Leases
As of September 30, 2021, and December 31, 2020, the Company has no long-term leases that require right-of-use assets or lease liabilities to be recognized.
The previous lease for office space for Willow Oak Asset Management, LLC expired on September 30, 2020, and has been renewed on a month-to-month basis beginning on October 1, 2020. The previous lease for warehouse space for corporate matters was a short-term lease, under 12 months, and expired in February 2020. In accordance with ongoing accounting policy elections, the Company does not recognize right-of-use (ROU) assets or lease liabilities for short-term or month-to-month leases. Total rental expenses attributed to these short-term leases for the three- and nine-month periods ended September 30, 2021, were $
There were
As the Company has no remaining leases classified as operating leases or financing leases as of the periods ended September 30, 2021, and December 31, 2020, there are no future liabilities or maturities of lease obligations recognized on the accompanying consolidated balance sheets.
Litigation & Legal Proceedings
Enterprise Diversified, Inc. (f/k/a Sitestar Corporation) v. Frank Erhartic, Jr.
As has been previously reported, on April 12, 2016, the Company filed a civil action complaint against Frank Erhartic, Jr. (the “Former Erhartic CEO”), the Company’s former CEO and director (prior to December 14, 2015) and currently an owner of record or beneficially of more than 5% of the Company’s Common Stock, alleging, among other things, that the Former Erhartic CEO engaged in, and caused the Company to engage in to its detriment, a series of unauthorized and wrongful related-party transactions, including causing the Company to borrow certain amounts from the Former Erhartic CEO’s mother unnecessarily and at a commercially unreasonable rate of interest, converting certain funds of the Company for personal rent payments to the Former Erhartic CEO, commingling in land trusts certain real properties owned by the Company and real properties owned by the Former Erhartic CEO, causing the Company to pay certain amounts to the Former Erhartic CEO for lease payments under an unauthorized lease as to a storage facility owned by the Former Erhartic CEO, causing the Company to pay rent on its corporate headquarters owned by the Former Erhartic CEO’s ex-wife in amounts commercially unreasonable and excessive, and to make real estate tax payments thereon for the personal benefit of the Former Erhartic CEO, converting to the Former Erhartic CEO and/or absconding with five motor vehicles owned by the Company, causing the Company to pay real property and personal property taxes on numerous properties owned personally by the Former Erhartic CEO, causing the Company to pay personal credit card debt of the Former Erhartic CEO, causing the Company to significantly overpay the Former Erhartic CEO’s health and dental insurance for the benefit of the Former Erhartic CEO, and causing the Company to pay the Former Erhartic CEO’s personal automobile insurance. The Company is seeking, among other relief available, monetary damages in excess of $
Other: Mt Melrose-related Proceedings
As has been previously reported, various disputes had arisen between the Company and Woodmont Lexington, LLC (“Woodmont”), the entity to whom the Company previously sold, on June 27, 2019,
As has been previously reported, these disputes had resulted in certain litigation between the parties commenced by the Company on November 20, 2019, in the Delaware Court of Chancery, Enterprise Diversified, Inc. v. Woodmont Lexington, LLC, et al., C.A. No. 2019-0928-JTL (Del. Ch.) (the “Delaware Action”), as well as certain litigation between the parties previously pending in the Circuit Court in Fayette County, Kentucky, Mt Melrose II, LLC, et al. v. Enterprise Diversified, Inc., C.A. No. 19-CI-4304 (Ky. Fayette Cir. Ct.). As also has been previously reported, commencing in March 2021, the Company and Woodmont agreed to engage in voluntary mediation concerning their various disputes through the Delaware Court of Chancery.
As outcome to the parties’ mediation, on May 17, 2021, the Company, on the one hand, and Woodmont and Mt Melrose, on the other hand, entered into a confidential settlement agreement and mutual general release, pursuant to which the parties have amicably settled all of their disputes and the previously reported related litigation between them. Pursuant to such settlement, all rights and obligations of the Company to Woodmont and/or Mt Melrose, and of Woodmont and/or Mt Melrose to the Company, set forth in the membership interest purchase agreement between the Company and Woodmont and the Amended and Restated Limited Liability Company Agreement of Mt Melrose, LLC by and among the Company and Woodmont dated June 27, 2019, and all amendments of those agreements, have been terminated and are of no further force or effect, effective as of May 17, 2021. As consideration for such termination and the Company’s sale to Woodmont of all of the Company’s membership interests in Mt Melrose, the Company received $
NOTE 12. STOCKHOLDERS’ EQUITY
Classes of Shares
As of September 30, 2021, the Company’s Articles of Incorporation, as amended, authorize an aggregate of
Preferred Stock
Preferred stock, any series, shall have the powers, preferences, rights, qualifications, limitations, and restrictions as from time to time fixed by the Company’s Board of Directors in its sole discretion. As of September 30, 2021, the Company has not issued any shares of its preferred stock (including, without limitation, its Series A Preferred Stock).
As previously reported in the Company’s Current Report on Form 8-K filed with the SEC on July 29, 2020, the Company has adopted a certain stockholder rights agreement styled as the Tax Benefit Preservation Plan, dated as of July 24, 2020, by and between the Company and Colonial Stock Transfer Company, Inc., as rights agent. The Tax Benefit Preservation Plan was adopted as a means designed to safeguard against inadvertent diminution or limitation of the Company’s valuable tax assets. As previously reported, pursuant to the Tax Benefit Preservation Plan, as of July 24, 2020, the Company has designated a series of its preferred stock as the Series A Preferred Stock, consisting of
Common Stock
As of September 30, 2021,
As previously reported in the Company’s Current Report on Form 8-K Amendment No. 1 filed with the SEC on July 8, 2021, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Nevada Secretary of State on June 16, 2021, increasing the number of shares of common stock, par value of $
NOTE 13. SUBSEQUENT EVENTS
Management has evaluated all subsequent events from September 30, 2021, through the date the unaudited condensed consolidated financial statements were issued. Management has concluded that no subsequent events have occurred that would require recognition or disclosure in the consolidated financial statements.
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This section is intended to provide readers of our financial statements information regarding our financial condition, results of operations, and items that management views as important. The following discussion and analysis should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and related footnotes for the three- and nine-month periods ended September 30, 2021. The discussion of results, causes, and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future. Additionally, it should be noted that a uniform comparative analysis cannot be performed for all segments, as a segment’s limited financial history or recent restructuring results in less comparable financial performance.
Overview
During the three-month period ended September 30, 2021, Enterprise Diversified, Inc. (“ENDI,” the “Company,” or “we”) operated through four reportable segments:
| ● |
Asset Management Operations - this segment includes revenue and expenses derived from our various joint ventures, service offerings, and initiatives undertaken in the asset management industry; |
| ● |
Real Estate Operations - this segment includes (i) prior to its sale on May 17, 2021, our equity in Mt Melrose, LLC, which manages properties held for investment and held for resale located in Lexington, Kentucky, and (ii) revenue and expenses related to the management of legacy properties held for investment and held for resale through EDI Real Estate located in Roanoke, Virginia; |
| ● |
Internet Operations - this segment includes revenue and expenses related to our sale of internet access, hosting, storage, and other ancillary services; and |
| ● |
Other Operations - this segment includes any revenue and expenses from nonrecurring or one-time strategic funding or similar activity that is not considered to be one of our primary lines of business, and any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company. |
During periods prior to the quarter ended June 30, 2019, the Company also operated through a fifth reportable segment, Home Services Operations, comprised of former subsidiary Specialty Contracting Group, LLC’s operation of HVAC and plumbing companies in Arizona. However, for the three- and nine-month periods ended September 30, 2021, and for all prior periods presented, Home Services Operations are reported as discontinued operations.
The management of the Company also continually reviews various business opportunities for the Company, including those in other lines of business.
Asset Management Operations
The Company operates its asset management operations business through its wholly owned subsidiaries, Willow Oak Asset Management, LLC (“Willow Oak”), Willow Oak Capital Management, LLC, Willow Oak Asset Management Affiliate Management Services, LLC ("Willow Oak AMS"), and Willow Oak Asset Management Fund Management Services, LLC (“Willow Oak FMS”).
In 2016, the Company made a seed investment, through Willow Oak, to assist in the launch of Alluvial Fund, LP, a private investment fund that was launched on January 1, 2017, by an unaffiliated sponsor and general partner, Alluvial Capital Management, LLC. The Company had determined that Willow Oak’s support of Alluvial Capital Management, LLC and its direct investment in Alluvial Fund were both beneficial and necessary undertakings in conjunction with establishing an asset management operations business and gaining credibility within that industry. As a special limited partner, Willow Oak earns a share of management and performance fees earned. On May 31, 2021, however, Willow Oak initiated a liquidating distribution of its investment in Alluvial Fund, which such withdrawal will be fulfilled by the general partner according to a mutually agreed upon cash distribution schedule. During the quarter ended September 30, 2021, Willow Oak initiated its second aggregate cash distribution totaling $5,579,679 in respect of such withdrawal. This brings the total distribution amount to $14,038,574 for the nine-month period ended September 30, 2021. As of September 30, 2021, Willow Oak holds a remaining direct investment in Alluvial Fund. Investment gains and losses are reported as revenue on the accompanying unaudited condensed consolidated statements of operations.
In furtherance of establishing the asset management operations business, Willow Oak signed a fee share agreement in June 2017, with Coolidge Capital Management, LLC (“Coolidge”), whose sole member is Keith D. Smith, an ENDI director. Willow Oak is the sole member of Bonhoeffer Capital Management, LLC, the general partner to Bonhoeffer Fund, LP, a private investment partnership launched by Willow Oak and managed by Coolidge. Under their agreement concerning Bonhoeffer Fund, LP, Willow Oak paid all start-up expenses and pays agreed-upon operating expenses that are not partnership expenses, Coolidge is responsible for all investment management, and Willow Oak receives 50% of all performance and management fees earned. Additionally, Willow Oak FMS earns a direct fee from the private limited partnership for the administrative, compliance, and tax and audit liaison services it renders.
On November 1, 2018, Willow Oak entered into a fund management services agreement with Arquitos Investment Manager, LP, which is managed by our Board chairman and principal executive officer, Steven L. Kiel, to provide Arquitos with Willow Oak’s Fund Management Services (“FMS”) consisting of the following services: strategic planning, investor relations, marketing, operations, compliance and legal coordination, accounting and bookkeeping, annual audit and tax coordination, and liaison to third-party service providers. Willow Oak earns monthly and annual fees as consideration for these services.
On October 1, 2019, Willow Oak partnered with Geoff Gannon and Andrew Kuhn to form Focused Compounding Capital Management, LLC (“Focused Compounding”). This joint venture, of which Willow Oak Capital Management is a 10% beneficial owner, manages capital through separately managed accounts and a private investment fund launched January 1, 2020. Willow Oak provides ongoing FMS and operational support in addition to having covered all one-time expenses associated with the launch of Focused Compounding Fund, LP. As consideration for the arrangement, Willow Oak Capital Management is entitled to 10% of gross management and performance fees earned by Focused Compounding. Additionally, Willow Oak FMS earns a direct fee from the private limited partnership for the administrative, compliance, and tax and audit liaison services it renders.
On September 29, 2020, Willow Oak, through Willow Oak AMS, executed a strategic relationship agreement with SVN Capital, LLC to become a 20% beneficial owner of the firm in exchange for the provision of certain ongoing FMS and operational services offered through Willow Oak FMS. As a beneficial owner of SVN Capital, LLC, Willow Oak is entitled to 20% of gross management and performance fees earned by the firm. Additionally, Willow Oak FMS earns a direct fee from SVN Capital Fund, LP, a private investment fund launched by the firm’s managing member, for the administrative, compliance, and tax and audit liaison services it renders.
Real Estate Operations
As has been previously reported, in December 2017, ENDI created New Mt Melrose, a wholly owned subsidiary at that time, to acquire a portfolio of residential and other income-producing real estate in Lexington, Kentucky, pursuant to a certain Master Real Estate Asset Purchase Agreement entered into in December 2017 with the seller, Old Mt. Melrose. During January and June 2018, New Mt Melrose, consistent with the terms of the purchase agreement, completed two bundled acquisitions from Old Mt. Melrose of residential and other income-producing real properties located in Lexington, Kentucky. As has been previously reported, on June 27, 2019, the Company sold 65% of its membership interest in New Mt Melrose to Woodmont, which agreed to assume full responsibility for the management and operation of New Mt Melrose and its real estate portfolio. As a result of no longer having a controlling financial interest, the Company deconsolidated the operations of New Mt Melrose as of June 27, 2019. As was previously reported in the Company’s Current Report on Form 8-K filed with the SEC on May 20, 2021, on May 17, 2021, the Company entered into an agreement with Woodmont that terminated and effected a sale to Woodmont of the Company’s remaining membership interests in New Mt Melrose in conjunction with a cash payment to the Company. As of the prior period ended June 30, 2021, the Company does not hold any remaining interests in the New Mt Melrose entity. See Notes 4 and 11 for more information.
As has been previously reported, in July 2017, ENDI created a wholly owned real estate subsidiary named EDI Real Estate, LLC, to hold ENDI’s legacy portfolio of real estate. As of September 30, 2021, through EDI Real Estate, LLC, ENDI owns a legacy real estate investment portfolio that includes one residential property and vacant land. Our real estate portfolio under EDI Real Estate, LLC is primarily located in Roanoke, Virginia. The portfolio includes an occupied single-family home that is managed by a third-party property management company. The lease in effect as of September 30, 2021, is based on a month-to-month provision as the initial annual term of the lease has been completed.
State and municipal laws and regulations govern the real estate industry in general and do not vary significantly throughout our real estate holding areas. State laws, including the Virginia Residential Landlord and Tenant Act, in addition to local ordinances, govern our rental properties and also do not vary significantly throughout our real estate holding areas.
Internet Operations
The Company operates its internet operations segment through Sitestar.net, a wholly owned subsidiary. Sitestar.net is an Internet Service Provider (ISP) that offers consumer and business-grade internet access, wholesale managed modem services, web hosting, third-party software as a reseller, and various ancillary services. We provide services to customers in the United States and Canada. This segment markets and sells narrow-band (dial-up and ISDN) and broadband services (DSL, fiber-optic, and wireless), as well as web hosting and related services to consumers and businesses.
Our primary competitors include regional and national cable and telecommunications companies that have substantially greater market presence, brand-name recognition, and financial resources compared to Sitestar.net. Secondary competitors include local and regional ISPs.
The residential broadband internet access market is dominated by cable and telecommunications companies. These companies offer internet connectivity through the use of cable modems, Digital Subscriber Line (DSL) programs, and fiber. These competitors have extensive scale and significantly more resources than Sitestar.net. Competitors often offer incentives for customers to purchase internet access by offering discounts for bundled service offerings (i.e., phone, television, and Internet). While we are a reseller of broadband services including DSL and fiber services, our profit margin is heavily influenced by these competitive forces.
There are currently laws and regulations directly applicable to access or commerce on the internet, covering issues such as user privacy, freedom of expression, pricing, characteristics and quality of products and services, taxation, advertising, intellectual property rights, information security, and the convergence of traditional telecommunications services with Internet communications. We may be positively or negatively affected by the repeal, modification, or adoption of various laws and regulations. These changes may occur at the international, federal, state, and local levels, and may cover a wide range of issues.
As of September 30, 2021, the focus of our internet operations segment is to generate cash flow, work to make our costs variable, and reinvest in our operations when an acceptable return is available. We did not make significant reinvestments into the internet operations segment during the three-month period ended September 30, 2021.
Management routinely endeavors to identify the market value for domain names owned by the Company in order to assess potential income opportunities. Management evaluates these domain names for third-party sales potential, as well as for other marketing opportunities that could generate new revenue from current customers who utilize the domains.
Other Operations
Other operations include nonrecurring or one-time strategic funding or similar activity and other corporate operations that are not considered to be one of the Company’s primary lines of business. Below are the main recent activities comprising other operations.
Financing Arrangement Regarding Triad Guaranty, Inc.
In August 2017, the Company entered into an agreement with several independent third parties to provide debtor-in-possession financing to an unaffiliated third party, Triad Guaranty, Inc., through Triad DIP Investors, LLC. The Company initially contributed $100,000. Triad Guaranty, Inc. exited bankruptcy in April 2018, and the Company subsequently entered into an amended and restated promissory note. As part of the amended and restated promissory note, the Company provided an additional contribution in the amount of $55,000 in May 2018. The terms of the promissory note provided for interest in the amount of 10% annually and the issuance of warrants in Triad Guaranty, Inc. equal to 2.5% of the company. On December 31, 2020, the Company accepted a revision of terms to the original promissory note which includes, among other things, an extension of the loan maturity date to December 31, 2022, an increase of interest to the amount of 12% annually, and a provision to settle all currently accrued interest through the issuance of Triad Guaranty, Inc. common shares. In line with the revision of note terms, during the three-month period ended March 31, 2021, the Company was issued 454,097 shares of Triad Guaranty, Inc. in lieu of interest accrued on the note receivable as of December 31, 2020.
Corporate Operations
Corporate operations include any revenue or expenses derived from corporate office operations, as well as expenses related to public company reporting, the oversight of subsidiaries, and other items that affect the overall Company.
Discontinued Operations - Home Services Operations
Prior to May 24, 2019, the Company operated its home services operations segment through its subsidiary, Specialty Contracting Group, LLC (formerly known as HVAC Value Fund, LLC). The Company had organized and launched this subsidiary in June 2016, initially with an unaffiliated third party. Specialty Contracting Group was focused on the management of HVAC and plumbing companies in Arizona.
As has been previously reported, on May 24, 2019, the Company completed its divestiture of the home services operations to Rooter Hero. See Note 3 for more information.
Summary of Financial Performance
Common stockholders’ equity increased from $14,043,411 at December 31, 2020, to $18,391,494 at September 30, 2021. This change was attributable to $4,212,365 of net income in the asset management operations segment, $818,350 of net income in the real estate operations segment, and $339,287 of net income in the internet operations segment, and was partially offset by a net loss of $1,261,919 in other segments. There was no reportable income attributed to discontinued operations for the nine-month period ended September 30, 2021. Corporate expenses for the nine-month period ended September 30, 2021, included in the net loss from other operations, totaled $925,832. Total comprehensive net income for the nine-month period ended September 30, 2021, equaled $4,108,083.
Balance Sheet Analysis
This section provides an overview of changes in our assets, liabilities, and equity and should be read together with our accompanying unaudited consolidated financial statements, including the accompanying notes to the financial statements. The table below provides a balance sheet summary for the periods presented and is designed to provide an overview of the balance sheet changes from quarter to quarter.
| September 30, 2021 |
June 30, 2021 |
March 31, 2021 |
December 31, 2020 |
September 30, 2020 |
||||||||||||||||
| ASSETS |
||||||||||||||||||||
| Cash and equivalents |
$ | 9,316,890 | $ | 9,399,112 | $ | 292,767 | $ | 341,007 | $ | 337,149 | ||||||||||
| Accounts receivables, net |
302,548 | 369,893 | 130,155 | 144,791 | 49,824 | |||||||||||||||
| Investment redemption receivable |
5,579,679 | — | — | — | — | |||||||||||||||
| Investments, at fair value |
3,765,834 | 8,512,439 | 15,736,234 | 13,574,462 | 11,135,580 | |||||||||||||||
| Real estate, total |
27,334 | 27,732 | 239,500 | 241,876 | 378,698 | |||||||||||||||
| Goodwill and other assets |
490,599 | 493,618 | 508,094 | 555,044 | 524,772 | |||||||||||||||
| Total assets |
$ | 19,482,884 | $ | 18,802,794 | $ | 16,906,750 | $ | 14,857,180 | $ | 12,426,023 | ||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||||||||||
| Accounts payable |
$ | 67,585 | $ | 48,920 | $ | 60,734 | $ | 65,524 | $ | 63,573 | ||||||||||
| Accrued expenses |
465,606 | 117,103 | 137,803 | 306,063 | 176,904 | |||||||||||||||
| Income taxes payable |
360,000 | — | — | — | — | |||||||||||||||
| Deferred revenue |
198,199 | 198,045 | 198,848 | 192,088 | 213,498 | |||||||||||||||
| Notes payable and other liabilities |
— | 24,461 | 247,305 | 250,094 | 646,791 | |||||||||||||||
| Total liabilities |
1,091,390 | 388,529 | 644,690 | 813,769 | 1,100,766 | |||||||||||||||
| Total stockholders’ equity |
18,391,494 | 18,414,265 | 16,262,060 | 14,043,411 | 11,325,257 | |||||||||||||||
| Total liabilities and stockholders’ equity |
$ | 19,482,884 | $ | 18,802,794 | $ | 16,906,750 | $ | 14,857,180 | $ | 12,426,023 | ||||||||||
Results of Operations
Asset Management Operations
The Company operates its asset management operations business through its wholly owned subsidiaries, Willow Oak Asset Management, LLC (“Willow Oak”), Willow Oak Capital Management, LLC, Willow Oak Asset Management Affiliate Management Services, LLC (“Willow Oak AMS”), and Willow Oak Asset Management Fund Management Services, LLC (“Willow Oak FMS”). These subsidiaries were formed on October 10, 2016, May 24, 2018, and August 21, 2020, respectively. During the segment’s first year of operations, Willow Oak entered into three fee share agreements with multiple private investment partnerships and made an additional investment through another partnership arrangement. During the year ended December 31, 2018, two partnerships were formed, multiple fee share agreements were entered into, and a new service offering, Fund Management Services, was launched. During the year ended December 31, 2019, one joint venture was formed in which Willow Oak Capital Management is a non-managing beneficial owner. During the year ended December 31, 2020, we assisted in the launch of a private investment fund, and two wholly owned entities, Willow Oak AMS and Willow Oak FMS, were formed to advance strategic relationships with external investment firms. Additionally, Willow Oak formalized a strategic relationship with an investment firm, becoming a non-managing beneficial owner in exchange for the provision of certain ongoing FMS and operational services.
As of September 30, 2021, Willow Oak holds a remaining direct investment in the Alluvial Fund, LP. The realized and unrealized investment gains and losses are reported as revenue on the accompanying unaudited condensed consolidated statements of operations. This treatment can result in reporting negative revenue figures for a given period.
Willow Oak continues to earn revenue through fee share arrangements, as well as through fund management services.
During the three-month period ended September 30, 2021, the asset management operations segment produced $806,314 of revenue. Cost of revenue was $0 and operating expenses totaled $113,158. Net income for the three-month period ended September 30, 2021, totaled $693,156. This compares to the three-month period ended September 30, 2020, when the asset management operations segment produced $1,607,150 of revenue, cost of revenue was $0, and operating expenses totaled $120,368. Total net income for the three-month period ended September 30, 2020, was $1,486,782.
The decrease in revenue for the three-month period ended September 30, 2021, is primarily due to decreased returns through the Company’s Alluvial Fund investment and a decrease in performance fee share revenues from the affiliate management services relationships. The slight decrease in operating expenses is primarily due to an decrease in legal and rent expenses.
As of September 30, 2021, the fair value of long-term investments held through the asset management operations segment totaled $3,720,424. This compares to the fair value of long-term investments held at December 31, 2020, which totaled $13,520,616. The decrease in investments is attributable to a first withdrawal of $8,458,895 made during the prior three-month period ended June 30, 2021 and a second withdrawal of $5,579,679 initiated during the current three-month period ended September 30, 2021, partially offset by positive Alluvial Fund performance during the nine-month period ended September 30, 2021. Management notes that, while short-term market volatility can have a significant effect on reported revenue for a given period, the Company’s overall investment strategy is ultra-long-term focused.
The tables below provide a summary of income statement amounts over time. These figures are specific to the asset management operations segment and are presented for the three- and nine-month periods designated below.
| For the three months ended |
For the nine months ended |
|||||||||||||||
| Asset Management Operations Revenue |
September 30, 2021 |
September 30, 2020 |
September 30, 2021 |
September 30, 2020 |
||||||||||||
| Realized and unrealized gains (losses) on investment activity |
$ | 829,579 | $ | 1,545,239 | $ | 4,167,650 | $ | 989,609 | ||||||||
| Management and performance fee revenue |
(44,539 | ) | 37,858 | 325,815 | 69,153 | |||||||||||
| Fund management services revenue |
21,274 | 24,053 | 62,708 | 72,053 | ||||||||||||
| Total revenue |
$ | 806,314 | $ | 1,607,150 | $ | 4,556,173 | $ | 1,130,815 | ||||||||
Real Estate Operations
For the three-month period ended September 30, 2021, the real estate operations segment generated revenue of $1,800 and cost of revenues of $466, all of which is attributed to rental activities. Operating expenses for the three-month period ended September 30, 2021, were $15,202. Other expenses totaled $332 and the total net loss for the three-month period ended September 30, 2021, totaled $14,200. Other expenses for the three-month period ended September 30, 2021, are interest-related expenses. This compares to the three-month period ended September 30, 2020, when the real estate operations segment generated revenue of $16,129 and cost of revenue of $12,157, all of which was also related to rental activities. Operating expenses for the three-month period ended September 30, 2020, were $5,940, other expenses totaled $5,456, and the total reported net loss was $7,424. Other expenses incurred during the three-month period ended September 30, 2020, were primarily interest-related expenses. The current period decreases in revenue and cost of revenue are due to the diminishing rental real estate portfolio. The increase in operating expenses is primarily due to the write-off of the remaining debt issuance costs associated with the interest-bearing note payable that was paid off during the current quarter.
EDI Real Estate Operations
As of September 30, 2021, and December 31, 2020, the EDI Real Estate portfolio of properties included the following units:
| EDI Real Estate |
September 30, 2021 |
December 31, 2020 |
||||||
| Units occupied or available for rent |
1 | 4 | ||||||
| Vacant lots held for investment |
3 | 3 | ||||||
| Total units held for investment |
4 | 7 | ||||||
| Units held for resale |
— | — | ||||||
| Vacant lots held for resale |
— | — | ||||||
| Total units held for resale |
— | — | ||||||
Units held for investment consist of single-family residential rental units.
The lease in effect as of September 30, 2021, is based on a month-to-month provision as the initial annual term of the lease has been completed. An outside property management company manages this rental property on behalf of the Company.
| EDI Real Estate |
September 30, 2021 |
December 31, 2020 |
||||||
| Total real estate held for investment |
$ | 43,846 | $ | 303,158 | ||||
| Accumulated depreciation |
(16,512 | ) | (61,282 | ) | ||||
| Real estate held for investment, net |
$ | 27,334 | $ | 241,876 | ||||
For the three-month period ended September 30, 2021, depreciation expense on the EDI Real Estate portfolio of properties was $397. This compares to the three-month period ended September 30, 2020, when depreciation expense on the EDI Real Estate portfolio of properties was $4,431.
There were no properties sold during the three-month periods ended September 30, 2021 and 2020. No properties were purchased during the three-month periods ended September 30, 2021 and 2020 for the EDI Real Estate portfolio.
There were no impairment adjustments recorded during the three-month periods ended September 30, 2021, and 2020.
Mt Melrose Operations
For the periods ended September 30, 2021, and December 31, 2020, prior to the sale of the remaining membership interests on May 17, 2021, the Company’s remaining investment in Mt Melrose was carried on our condensed consolidated balance sheets for $53,846. This carrying value was reflective of the mechanics of the June 27, 2019 transaction, as the Company could not obtain current appraisals for each individual property at that time. By way of the Mt Melrose transaction, the Company was able to significantly reduce direct and overhead expenses, improve net cash flows, and fully deconsolidate approximately $6.4 million of debt. Additionally, the Company was afforded the opportunity to refocus growth opportunities to its asset management operations segment. These circumstances, rather than the cash consideration received, are what strategically prompted the majority sale of the Mt Melrose entity. Additional debt restructurings and sales of previously inactive real estate properties allowed the portfolio to continue its redirection, which management believes provided long-term returns greater than its carrying value. Management’s belief was substantiated as the Company recognized a gain of $778,872 during the prior three-month period ended June 30, 2021 and current nine-month period ended September 30, 2021, on the sale of its then-remaining membership interests in the Mt Melrose entity. This gain is recognized on the accompanying unaudited condensed consolidated statements of operations as a gain on sale of noncontrolling interest in subsidiary. As of the prior period ended June 30, 2021, the Company no longer holds any interest in the Mt Melrose entity. No comparable activity existed for the three-month period ended September 30, 2020. See Notes 4 and 11 for more information.
Internet Operations
Revenue attributed to the internet operations segment during the three-month period ended September 30, 2021, totaled $218,097, and cost of revenue totaled $61,863. Operating expenses for the segment totaled $54,905 for the three-month period ended September 30, 2021, and other income totaled $19,930. Total net income for the internet operations segment was $121,259 for the three-month period ended September 30, 2021. This compares to the three-month period ended September 30, 2020, when revenue totaled $242,237, cost of revenues totaled $85,412, operating expenses were $49,239, other income was $777, and net income was $108,363. Other income for the segment during the current three-month period is primarily a result of the sale of a domain name. Other income for the segment during the three-month period ended September 30, 2020, is the result of refundable sales tax credits and credit card rewards.
As of September 30, 2021, we have a total of 6,932 customer accounts across the U.S. and Canada. This compares to the three-month period ended September 30, 2020, when we had a total of 7,119 customer accounts. As of September 30, 2021, approximately 51% of our revenue is driven by internet access services, with the remaining 49% being earned though web hosting, email, and other web-based storage services.
Approximately 92% of our customer accounts are U.S.-based, while 8% are Canada-based. Revenue generated by our U.S. customers totaled $207,678, and revenue generated by our Canadian customers totaled $10,419 during the three-month period ended September 30, 2021. This compares to revenue generated by our U.S. customers of $230,714, and revenue generated by our Canadian customers of $11,523 during the three-month period ended September 30, 2020.
Other Operations
For the three-month period ended September 30, 2021, the Company’s other operations segment did not produce any revenue or cost of goods sold. Operating expenses totaled $477,234, and other income was $14,248 for the three-month period ended September 30, 2021. Corporate operating expenses accounted for the full $477,234 of reported operating expenses for our other operations. Income tax expenses of $360,000 were also accrued during the three-month period ended September 30, 2021. This resulted in a net loss of $822,986 for the three-month period ended September 30, 2021. This compares to the three-month period ended September 30, 2020, when the other operations segment again did not produce any revenue or cost of goods sold, but did incur corporate operating expenses of $165,165, other income of $6,540, and a net loss of $158,625 for the period. Corporate expenses are higher for the three-month period ended September 30, 2021, primarily due to increased director fees and corporate legal expenses. The increase in income tax expenses for the three-month period ended September 30, 2021, is primarily attributable to the current period distribution activities related to the Company’s investment in Alluvial Fund.
Discontinued Operations - Home Services Operations
As noted previously, Specialty Contracting Group, LLC’s historical operations are now classified as “discontinued operations” in our consolidated financial statements, and all presented prior periods have also been reclassified to discontinued operations for comparability. For the three-month period ended September 30, 2021, there was no reportable net income from discontinued operations related to the home services operations segment. This compares to net income of $1,857 reported from discontinued operations related to the home services operations segment for the three-month period ended September 30, 2020.
Financial Condition, Liquidity, and Capital Resources
During the three-month period ended September 30, 2021, Enterprise Diversified carried out its business strategy in four operating segments: Asset Management Operations, Real Estate Operations, Internet Operations, and Other Operations. Our primary focus is on generating cash flow so that we have the flexibility to pursue opportunities as they present themselves. We will only invest cash in each segment if we believe that the return on this invested capital is appropriate for the risk associated with the investment. This consideration is measured against all investment opportunities available to us and is not limited to these particular segments or the Company’s historical operations.
Cash and equivalents totaled $9,316,890 at the three-month period ended September 30, 2021, compared to $341,007 at year-end December 31, 2020. Accounts receivable increased to $302,548 as of September 30, 2021, compared to $144,791 as of December 31, 2020. Real estate held for investment decreased to $27,334 at the period ended September 30, 2021, compared to $241,876 at year-end December 31, 2020. Long-term investments held as of September 30, 2021, decreased to $3,765,834 compared to $13,574,462 as of December 31, 2020. Additionally, accrued compensation decreased from $281,904 at the year ended December 31, 2020, to $268,227 at the three-month period ended September 30, 2021. Finally, total notes payable decreased to $0 at the three-month period ended September 30, 2021, compared to $250,094 at year-end December 31, 2020. The increase in cash and equivalents and decrease in long-term investments are attributable to the Company’s withdrawals from Alluvial Fund. The Company’s increase in accounts receivable are due to an increase in affiliate fee shares earned through Willow Oak’s various fee share arrangements. The decreases in real estate held for investment and total notes payable are due to the opportunistic sales of certain EDI Real Estate rental properties and simultaneous debt payoff of the attached property. The decrease in accrued compensation is due to the issuance of common stock during the three-month period ended March 31, 2021, which is then offset by the accrual of current year director fees. The Company does not expect to make significant reinvestments into property and equipment used in operating activities at this time.
The Company currently believes that our existing balances of cash, cash equivalents, and cash generated from operations will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months.
The aging of accounts receivable as of September 30, 2021, and December 31, 2020 is as shown:
| September 30, 2021 |
December 31, 2020 |
|||||||
| Current |
$ | 34,221 | $ | 142,121 | ||||
| 30 – 60 days |
1,632 | 1,836 | ||||||
| 60 + days |
876 | 834 | ||||||
| Accrued contract assets not yet due |
265,819 | — | ||||||
| Total |
$ | 302,548 | $ | 144,791 | ||||
We have no material capital expenditure requirements.
Contractual Obligations
In 2016, the Company made a strategic determination to fund a seed investment, through Willow Oak, to assist in the launch of Alluvial Fund, LP, a private investment fund that was launched on January 1, 2017, by an unaffiliated sponsor and general partner, Alluvial Capital Management, LLC. The Company had determined that Willow Oak’s support of Alluvial Capital Management, LLC and its direct investment in Alluvial Fund were both beneficial and necessary undertakings in conjunction with establishing an asset management operations business and gaining credibility within that industry. As of September 30, 2021, Willow Oak continues to hold its remaining direct investment in Alluvial Fund. Investment gains and losses are reported as revenue on the accompanying unaudited condensed consolidated statements of operations. During the prior three-month period ended June 30, 2021 and during the current three-month period ended September 30, 2021, the Company made/initiated withdrawals from the Alluvial Fund in order to further strengthen the Company’s assertion that it is not subject to the application of the Investment Company Act of 1940, further discussed below.
As has been previously reported, on June 27, 2019, the Company sold 65% of its membership interest in Mt Melrose, LLC to Woodmont. Under the terms of the parties’ membership interest purchase agreement, the Company had agreed to indemnify Woodmont against certain losses actually incurred by Woodmont as a result of breaches of the Company’s representations and warranties made under the agreement. Also, in connection with the transaction, the Company and Woodmont had entered into a certain Amended and Restated Limited Liability Company Agreement of Mt Melrose, LLC, which had set forth the general terms and conditions governing the arrangements between the two members; and, in addition, the Company had expressly agreed to a three-year “standstill” arrangement, during which time the Company would not in any way participate, directly or indirectly, in the management or control of Mt Melrose. In line with the Company’s sale of its remaining membership interests in Mt Melrose to Woodmont effective May 17, 2021, however, all of such contractual obligations have been terminated, and are no longer in effect as of the prior quarter ended June 30, 2021.
Off-balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements as of September 30, 2021, nor at any time from January 1, 2021, through September 30, 2021.
Discussion Regarding COVID-19 Potential Impacts
Due to the continuing uncertainty surrounding the COVID-19 pandemic, the Company has experienced, and continues to expect, market volatility as primarily related to its investment in the Alluvial Fund. As reported in prior periods, this volatility can create periods when the asset management operations segment produces negative revenue amounts. Due to the size of the investment, these negative revenue amounts can also have a sizable impact on the Company’s balance sheets at a given point in time. The nature of this investment has inherent market risks, and short-term results can be unpredictable.
Management continues to monitor and assess all Company operations for additional potential impacts of the COVID-19 pandemic. As of the three-month period ended September 30, 2021, the Company has not been forced to make significant operational changes as a result of the pandemic. Management does not anticipate additional challenges in meeting existing obligations, nor do we expect significant customer or vendor interruptions. However, the extent to which the continuing COVID-19 pandemic ultimately may impact our business, financial condition, liquidity, and results of operations likely will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the continuing pandemic, the direct and indirect impact of the continuing pandemic on our employees, customers, and service providers, as well as the U.S. economy, and the actions taken by governmental authorities and other third parties in response to the continuing pandemic.
Discussion Regarding the Company’s Status Under the Investment Company Act of 1940
As discussed above, the Company, directly and through our subsidiaries, currently is engaged primarily in asset management operations, real estate operations, and internet operations lines of business--that is, in businesses other than that of investing, reinvesting, owning, holding, or trading in securities. We are not engaged primarily, nor do we propose to engage primarily, in the business of investing, reinvesting, or trading in securities; nor does the Company propose to operate any of its businesses in a manner that would cause the Company to be subject to regulation as an “investment company” under the Investment Company Act of 1940 (the “1940 Act”).
In prior reporting periods, management had determined that our ownership of “investment securities” (as defined in the 1940 Act) exceeded 40% of the value of the Company’s total assets (exclusive of government securities and cash items), as measured under the 1940 Act. As of the quarterly period ended September 30, 2021, however, management has determined that our ownership of “investment securities” now falls below the 40% threshold established by the 1940 Act. This decrease is attributed to the completion of the Company’s second withdrawal from the Alluvial Fund, LP, which is in line with the distribution schedule mentioned previously. Our ownership of “investment securities” was largely comprised of our investment and limited partnership interests in Alluvial Fund, LP. In this respect, as the composition of our assets had changed over recent time, including by virtue of our previous sale of membership interests in Mt Melrose, LLC and our previous divestiture of the former Home Services Operations segment, the impact of our long-standing Alluvial Fund investment to the composition of our total assets, as measured under the 1940 Act, had become more pronounced, albeit inadvertently.
Beginning during the quarterly period ended March 31, 2021, and continuing, to date, on an ongoing monthly basis, representatives from the Securities and Exchange Commission (“SEC”) Division of Investment Management and the Company have engaged in informal discussions and correspondence regarding a general inquiry by the SEC as to the Company’s current status under the 1940 Act, namely as a result of the apparent quantitative significance of the Company’s assets that may constitute “investment securities” in relation to the Company’s total assets, as noted above.
As a result of such discussions and correspondence among the Company and the SEC, the Board of Directors of the Company reconfirmed, during the quarterly period ended March 31, 2021, that the Company has a bona fide intent to be engaged primarily in lines of business not constituting that of investing, reinvesting, or trading in securities, nor that of acquiring, owning, or holding “investment securities,” and the Board has resolved to explore certain strategic options so as to eliminate as soon as is reasonably possible any uncertainty in regard to the Company’s status under the 1940 Act. In this respect, the Company is in the process of developing and implementing a strategic operational plan setting forth specific potential steps designed to grow certain operational lines of business and effect changes to the composition of our assets in the near future. For example, on May 31, 2021, in order to further strengthen the Company’s assertion that it is not subject to the application of the 1940 Act, Willow Oak initiated a liquidating distribution of its investment in Alluvial Fund, which such withdrawal will be fulfilled by the general partner according to a mutually agreed-upon cash distribution schedule. Furthermore, in accordance with this schedule, a second withdrawal was initiated as of the current period ended September 30, 2021. There can be no assurances, of course, that we will be successful in our formulation and/or carrying out of any strategic operational plan.
| Quantitative and Qualitative Disclosures About Market Risk |
This item is not required by smaller reporting companies.
| Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of our principal executive officer and principal financial officer, have evaluated the effectiveness of the design and operation of our “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of September 30, 2021. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures. Because of inherent limitations, any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired control objective. Based upon this evaluation, and based upon material weaknesses in our internal control over financial reporting identified as of the date of our most recent evaluation of internal controls over financial reporting, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2021.
Changes in Our Internal Control over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the fiscal quarter ended September 30, 2021, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting subsequent to the date of our most recent evaluation of the Company’s internal control over financial reporting.
| Legal Proceedings |
Pursuant to Item 103 of Regulation S-K, as amended, the information required by this item is provided by cross-reference to the Company’s legal proceedings disclosure located under the Litigation & Legal Proceedings heading in Note 11 to the accompanying unaudited consolidated financial statements (see page 23).
| Risk Factors |
This item is not required for smaller reporting companies.
| Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Item 3. | Defaults Upon Senior Securities |
None.
| Mine Safety Disclosures |
Not applicable.
| Other Information |
None.
| Exhibits |
| Exhibit |
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Description |
| 3.1 | Certificate of Amendment to the Articles of Incorporation (June 16, 2021) (a) | |
| 31.1 |
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Certification of Principal Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) |
| 31.2 |
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Certification of Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) |
| 32 |
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| 101 |
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Pursuant to Rule 405 of Regulation S-T, the following materials from Enterprise Diversified, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline eXtensible Business Reporting Language (iXBRL) (b): (i) Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020; (ii) Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021, and 2020; (iii) Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021, and 2020; (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021, and 2020; (v) Notes to Unaudited Condensed Consolidated Financial Statements |
| 104 | Cover page Interactive Data File (formatted as Inline XBRL and combined in Exhibit 101) |
(a) Filed as Exhibit 3.1 to Registrant’s Form 8-K Amendment No. 1 filed with the Securities and Exchange Commission on July 8, 2021, and incorporated herein by reference.
(b) These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ENTERPRISE DIVERSIFIED, INC. |
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| Date: November 12, 2021 |
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/s/ Steven L. Kiel |
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Steven L. Kiel |
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Executive Chairman |
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(Principal Executive Officer) |
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| Date: November 12, 2021 |
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/s/ Alea A. Kleinhammer |
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Alea A. Kleinhammer |
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Chief Financial Officer |
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(Principal Financial Officer) |